Cuddly, cute, ubiquitous … and overpriced to billyo, says Clime Capital.
Photo: Robert Rough

Deutsche Bank tips sale of the century ::

Date: 14/04/2006
Publication: Sydney Morning Herald

At these prices? Ah, what the heck. Buy more!

WE DON'T know if they're just trying to drum up business or simply pick the next winner but strategists at Deutsche Bank reckon there's plenty more M&A activity coming.

"A heightened phase of M&A activity looks to be under way in Australia, with conditions very conducive to increased corporate activity," Tony Brennan and Barry McAlinden told clients this week.

The activity was equally probable in buoyant industries and those where the going is tough, they said.

"In the energy sector, where record oil and gas prices have boosted cash flows and large production reserves are sought after, we see acquisitions as quite likely," Deutsche said.

"But in the gaming and wagering industry, where conditions have been difficult, we also expect further moves, given uncertainty created by prospective regulatory change and new entrants."

Other areas ripe for activity include mining, utilities, infrastructure, media and general insurance.

Less likely is healthcare, transport and property, "where significant consolidation has already occurred or is pending", and in retailing, banking and telecommunications due to competition concerns.

Here are some highlights of their top 22 M&A tips from a fancy flow chart.

• Coles, now separated from the struggling Myer department stores, may be of interest to private equity or overseas buyers given its low gearing and reasonable valuation.
• John Fairfax Holdings is "a key takeover target", most likely to James Packer's Publishing & Broadcasting Ltd, "with its attractive titles and potential news synergies".
• McGuigan Simeon Wines coming under the microscope from Californian winemakers Gallo.
• Major overseas banks such as Citigroup, HBoS and HSBC may look to increase market share via acquisitions of St George or Suncorp.
• Santos may have a crack at Harman or AWE.

Interestingly, the brokers suggest, contrary to popular opinion, that Newmont is not likely to have a crack at Newcrest.

C for ABC

It would appear a brave call to rate a stock trading at about $8 as worth $3 but that's what Clime Capital thinks of ABC Learning.

With most brokers calling the childcare company between $7 and $8, and after a strong share price rise in recent years, Clime says ABC's share price would have to fall about 65 per cent to be of any interest.

Clime's chief criticism involves ABC's diminishing return on equity from 48 per cent in 2002 to below 11 per cent in 2006, during which time equity raised grew from $10 million a year to $330 million.

"If the return on equity remains at 11 per cent and we adopt a 15 per cent required return, the only sensible price to pay for the business is a discount to the equity in the business," Clime writes, adding its estimate of value is "less than $3".

"If ground level represents value, the share price is hovering somewhere in the stratosphere."

Airline savers

Qantas may save as much as $35 million a year from its plan to share cross-Tasman flights with Air New Zealand, analysts say.

The two carriers have proposed a code-sharing accord on routes covering the Tasman to help cut costs.

"The financial benefits for both parties are significant," said Macquarie Bank's Paul Huxford, adding that Air Kiwi could save $NZ40 million.

Qantas and Air New Zealand combined have 75 per cent of the market for travel between the countries.

Air New Zealand boss Rob Fyfe says the equivalent of 11 empty Airbus SAS A320 aircraft make two return trips daily across the Tasman.

And think of the greenhouse effect.

Multis look cheap

Nothing like a low price to provide a buying opportunity.

So says Citigroup's property team, which has upgraded Multiplex to a "buy/high risk" from a "hold/high risk".

The broker says the new recommendation "is a value play based on what we believe is a disconnect between its current trading price [$2.98, up 6c] and our value … of $3.11".

Citigroup has kept its target price of $3.36 a stapled security, saying the stock will in time be bolstered by the strong performance of the Mutliplex Property Trust.

There is a consensus in the real estate game that the office sector has turned the corner, with stronger rents and falling vacancies, which should stand Multiplex in good stead, given its high office asset exposure.

Furthermore, when the group looks at asset divestments, as has been signalled by chief executive Andrew Roberts, good prices are forecast.

Atlas pumps iron

Thursday was a pretty good day for Atlas Iron (formerly Atlas Gold).

In the morning the Pilbara hopeful announced that the UK Merrill Lynch Natural Resources Fund had agreed to take up a $3.8 million share placement, giving the company a heavyweight insto on its register.

Considering the placement was at 45c and Atlas jumped 4.5c to 55c, shareholders clearly weren't upset that Merrill bought in below the market.

Atlas was already sitting pretty compared to a lot of iron ore hopefuls in that its main project is only 75 kilometres from Port Hedland - meaning it could truck the ore to the port rather than having to build a railway.

But the news got even better in the afternoon, when the company said it had grabbed a swag of new tenements from Dynasty Metals Australia.

The latest land package completely surrounds BHP Billiton ground in an area about 100 kilometres from Port Hedland.

Edited by Michael Evans

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